MercoPress. South Atlantic News Agency

China rises bank reserves to cool economy

China's central bank announced Friday it was raising the bank reserve requirement for the third time this year to soak up excess liquidity in the banking system as the nation's trade surplus mounts.

The People's Bank of China said the ratio of commercial bank deposits that must be held in reserve was to increase by 0.5%, as from November 15.

"Since the beginning of the year, the People's Bank of China has used a combination of different instruments to soak up liquidity in the banking system and that has reduced excess liquidity", the central bank said in a statement on its website. But it also admitted that excess liquidity remains a problem that needs to be addressed.

The bank did not specifically state the new reserve figure but the increase would bring the main reserve ratio to 9 % with poorer performing banks required to maintain reserves of 9.5%. Analysts said the move will freeze the equivalent of some 19 billion US dollars.

In addition to increasing the reserve ratio, the central bank has raised interest rates twice this year to help slow lending and keep the economy from overheating.

Economic growth slowed to 10.7% in the first three quarters of this year, down from the 10.9% in the first half, on the back of a slowdown in fixed-asset investment.

The slowdown came as the government began to tighten monetary and administrative policy at the start of the second quarter.

Central bank vice Governor Su Ning said that China's economy is moving in the right direction but he sees the potential of a rebound in investment.

The central bank admitted in its latest statement that China's excess liquidity is largely due to the trade surplus, which hit 109.8 billion US dollars for the January-September period, surpassing the 102 billion for the whole of 2005.

Critics of China's currency regime insist that significant Yuan appreciation is the cure for China's trade imbalance, calling for a strengthening of as much as 40%.

But analysts also point out to the fact that China's impressive growth record has created a parallel boom in debts with top banks holding an estimated 130 billion US dollars in bad debts, which is also influencing the excess of liquidity.

Meantime the International Monetary Fund said it had again increased the growth estimate of the Chinese economy for this year.

"We estimate growth will be above 10.5%", said Steve Dunaway IMF delegate in China. The original IMF estimate was 10%, similar to 2004 and 2005.